Where to from here for the Medibank Private Ltd share price?

It’s very nearly one year on since Australia’s largest private health insurer (PHI), Medibank Private Ltd (ASX: MPL) was sold by the Federal Government to investors in a $5.5 billon initial public offering (IPO).

With the float set at $2 per share for retail investors, the thousands of shareholders who received and still hold their shares in Medibank Private, are currently sitting on capital gains of approximately 16%. (Based on the current share price of $2.32).

That’s a superb one-year return, particularly when you consider that the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has fallen over 2% in that time.

With the stock having performed well and investors having also pocketed an inaugural final dividend of 5.3 cents per share it could now be time for shareholders to ask the question – where to from here?

As the prospectus touted there are certainly reasons to be positive on the outlook for Medibank specifically and the PHI industry generally.

These positives include Medibank’s scale which provide it with unique operating leverage to negotiate favourable terms with key suppliers such as hospitals; the group’s widely recognised brand name and entrenched customer base is also a key positive. Meanwhile, given the challenges faced by governments to fund health costs, government support for PHI seems assured.

There are however a number of reasons to be concerned about downside risks to Medibank’s share price. These include increased competition from “no-frills” PHI providers, a weak economy which is encouraging policy holders to trade down to “no frill” options, health cost inflation, and regulatory risk as both state and federal governments look for ways to reduce their health sector funding costs.

Lastly, with Medibank’s shares trading on a forecast price-to-earnings ratio of 20.3x, the stock is priced well above the average of the insurance sector – although slightly below its closest peer, NIB Holdings Limited (ASX: NHF) – which suggests the stock is relatively expensive.

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Motley Fool contributor Tim McArthur owns shares in NIB Holdings Ltd. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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